Capital Gains Tax: CGT event D1 - lifetime right to reside in dwelling

Will a CGT event in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of a taxpayer entering into an arrangement under which they provide their parent with a lifetime right to reside in a dwelling in exchange for a lump sum?

Yes. CGT event D1 in section 104-35 of the ITAA 1997 will happen as a result of the taxpayer entering into an arrangement under which they provide their parent with a lifetime right to reside in a dwelling in exchange for a lump sum.

The taxpayer's elderly parent sold their main residence. The taxpayer's parent gave the taxpayer a lump sum in exchange for the taxpayer providing their parent with a lifetime right to reside in a granny flat and domestic assistance (such as washing, cleaning, cooking and shopping) for the rest of their parent's life.

No formal written contract has been entered into and none is proposed.

CGT event D1 happens when you create a contractual right or other legal or equitable right in another person or entity (subsection 104-35(1) of the ITAA 1997). CGT event D1 will happen under the proposed arrangement because the taxpayer has created a right in their parent to reside in the granny flat.

The taxpayer will make a capital gain if the capital proceeds from creating the right are more than the incidental costs incurred that relate to the event. They will make a capital loss if the capital proceeds are less than the incidental costs (subsection 104-35(3) of the ITAA 1997).

The capital proceeds from a CGT event include the amount of money and the value of any property the taxpayer receives, or is entitled to receive, in respect of the event happening (section 116-20 of the ITAA 1997).

However, if the taxpayer and the party in whom the right is being created do not deal at arm's length, the capital proceeds will be taken to be the market value of the right rather than the money or property received (subsection 116-30(2) of the ITAA 1997).

Parties are said to be dealing at arm's length if each acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties but also the quality of the bargaining between them.

The market value of a lifetime right to reside in a dwelling will depend on a number of factors including the life expectancy of the person who is the subject of the right and the nature of the dwelling.

The incidental costs which the taxpayer may incur in connection with this CGT event include consultancy fees, fees for legal advice and fees for any valuations that have been obtained (section 110-35 of the ITAA 1997).

Accordingly, the taxpayer may make a capital gain or loss from CGT event D1 in section 104-35 of the ITAA 1997 happening as a result of their entering into an arrangement under which they provide their parent with a lifetime right to reside in a dwelling in exchange for a lump sum.